If you are like most of us, you probably don’t nitpick each deduction on your paycheck every pay day. You know that the basics come out. There’s taxes, your healthcare premium, and, of course, Social Security. But when is the last time, if ever, you actually thought about just how much of your hard-earned money is going to Social Security?
Between you and your employers, you’ve doled out 12.4% of your annual income. And that is true all the way back to your first job as a teenager. So by this point, after years of paycheck after paycheck, it’s added up to a substantial amount. So substantial that it could even make your 401(k) look like chump change. Realizing this, why wouldn’t you want to maximize your benefits so you don’t unknowingly forfeit money that’s rightfully yours?
As we all know, Social Security is quite a complicated system. And unfortunately, people mistakenly believe false information and make incorrect assumptions about how this system actually works. Some of these mistakes are minor, but others can be pretty drastic and can even bring about financially devastating results. That is a scary thought, so today we want to uncover some common Social Security myths and expose the truth to help you avoid leaving your money on the table.
Myth #1: Social Security Won’t Exist In The Future
The word on the street these days is that Social Security won’t be around much longer. This myth leaves many of us, especially those nowhere close to retirement yet, quite concerned. However, here are the facts: Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to stop in 2019, leaving the system to rely on incoming interest payments to make up the deficit until 2034. At that point, if no changes are made, benefit payments may shrink. But even still, they would only shrink to about 75% of what Americans were expecting; they would not completely disappear. (1)
Unfortunately, you can’t control whether the Social Security program fails or succeeds. Therefore, your best plan of action is to educate yourself and plan ahead accordingly. One great way to do so is to create an account on the Social Security website in order to understand your current benefits and know where you stand. And keep in mind, a great deal of things can happen between now and 2034 that could impact the program. So don’t believe the agitated assumption that there will be no money left for you by the time you are ready to retire.
Myth #2: What You Give Is What You Get
Many believe that the amount of Social Security they pay is being stored up for them and that saved money is what they will get back once they retire. That is simply not true. What actually happens is the taxes that every income earner pays out are pooled together and then paid out. So your current contributions are supporting others now, and when you retire, the money others pay into the system will support you.
In 1960, the contributing workers-to-beneficiaries ratio was 5:1. In 2013, it was 2.8:1. (2) So even though the number of workers paying Social Security is decreasing, there are still more paying in than receiving benefits. However, as time goes on and our life expectancy keeps increasing, there is a possibility that you may need to mentally prepare for your benefit amount to be less than you expect.
Myth #3: Everyone Contributes Equally To Social Security
Many believe that everyone pays an equal percentage relative to the amount they make. For example, everyone paying 5% of their net income implies that someone who makes $5 million per year is contributing much more than someone who makes $25,000. Unfortunately, that is just not true.
The reality is that every employee pays 6.2% out of their paychecks, with their employer paying another 6.2% as well, to fund Social Security. (The tax rate for self-employment income in 2018 is 12.4 percent.) This is subject to an earnings cap of $128,400 in 2018. So if you earn $129,000 per year and your neighbor earns $5 million, you will both pay the same Social Security deduction of $7,960.80. (3) Everyone pays the same total amount, with the exception of those making less than $128,400, who contribute less. If this earnings cap was eliminated, it’s estimated that 71% of the trust fund shortfall could be wiped out.
Myth #4: You Should Claim Social Security At Age 65
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you choose to collect these benefits will impact the amount of benefit you receive.
Full retirement age (FRA) changes based on the year you were born. For those born in 1937 and earlier, FRA is 65. After 1937, two months is added each year until FRA becomes 66 for those born between 1943 and 1954. Starting in 1955, two months a year is added again until the FRA becomes 67 for those born in 1960 or later. (4)
If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full Primary Insurance Amount, which is the full benefit that you have earned. If you decide to collect early, you receive only a percentage of that Primary Insurance Amount, which can vary from 30% to 6.7% depending on how early you decide to begin collecting. (5)
Myth #5: Your Benefit Amount Is Fixed
As we just learned above, collecting your Social Security benefit before you reach your Full Retirement Age will result in you forfeiting a percentage of what you have earned and accepting a lower payout. But did you know that for every year beyond your FRA that you delay taking benefits, the value increases by 8%, all the way up until you reach age 70? There is nowhere else you can get an 8% return guaranteed by the U.S. government! (6) This means that your benefit amount is not fixed, and depending on when you begin to collect, you will either leave money on the table, receive exactly what you’ve earned, or even make out with some extra.
Myth #6: Social Security Benefits Are Tax-Free
This is only true to a certain extent. Social Security benefits are not taxed if you are not receiving any other form of substantial income or are above your FRA.
However, if you are collecting your benefit while below your FRA and receiving another source of income that surpasses the set yearly earnings limit, then your Social Security benefit will be reduced by $1 for every $2 you earn. For 2018, this limit is $17,040. These income restrictions start to change at the beginning of the year in which you will reach your FRA. That year there is a higher limit: $45,360 for 2018. (7)
Once your income supersedes that limit, your Social Security benefit will be reduced by $1 for every $3 you earn. As soon as you have your birthday and reach FRA, though, all limits are lifted. You can earn as much as you want and it has no effect on your Social Security retirement benefits.
Myth #7: You Can Switch Claiming Strategies At Any Time
A shocking 38% of people incorrectly believe they can simply switch their claiming strategy with no repercussion after they’ve made their official choice.The truth is that you can withdraw your claim and re-apply at a future date, however, it is far from being done without consequence. (8)
The Social Security website states that you may withdraw your claim only once within your lifetime, and it must be done within 12 months of the original date you applied. Furthermore, you must repay all the benefits you and your family received, including all benefits your spouse or children received, whether they are living with you or not. (9)
Myth #8: Your Claiming Strategy Affects Your Ex-Spouse
Many people believe that if they receive benefits based on their ex-spouse’s record, it will affect the benefit of their ex-spouse. The truth is actually just the opposite. The amount of benefits you would receive based on their record actually has no effect on the benefits of your ex-spouse or their current spouse.
With that being said, there are criteria that need to be met in order to do so. You must have been married for 10 consecutive years, have not remarried (unless your later marriage has already ended by annulment, divorce, or death), and have divorced at least two years before applying. If you meet these criteria, then you are entitled to either your full benefit or up to half of your former spouse’s benefit, whichever is greater. (10)
Myth #9: You Will Receive Your Benefits Promptly
Social Security, like most other programs similar in complexity, requires some time to process and begin. So, if you are in need of your first Social Security check in less than three months, chances are you are out of luck. It is generally recommended that you file for benefits around three months before you need your first payment. However, your application can only be processed a maximum of four months before benefits are scheduled to begin. This means that if you are planning on starting as soon as you are eligible at age 62, you cannot apply before you are 61 years and 9 months old. (11)
Myth #10: Social Security Is A Headache
While it may seem like there is a lot of stress involved with making sure you optimize your Social Security benefit, the fact is Social Security remains a major piece of your retirement puzzle. It was designed to replace 40% of an average worker’s wages, (12) and that’s a significant amount of money you don’t want to just throw your hands up and walk away from. However, there is a lot to know to make sure you maximize your benefit. And since there is no one-size-fits-all claiming strategy, it is imperative that you work with an experienced professional who can provide you with confidence and make the whole process much less overwhelming.
You Don’t Have To Be An Expert, You Just Have To Know Who To Ask
Here at Boston Metro Advisor, our goal is to help those nearing retirement age develop a perfect personalized financial plan to address their unique needs. We believe that an integral part of this plan is your Social Security benefit. We work hard to educate you on your opportunities, answer your questions, and offer objective guidance. If you are nearing retirement and want to partner with someone who is passionate about helping you maximize your Social Security benefit and pursue your ideal retirement, reach out to us for a complimentary consultation by calling (781) 995-0253 or emailing [email protected].
Paul McNulty is the founder of Boston Metro Advisor with over 20 years of experience helping people navigate the ups and downs of the economy toward the financial future they envision. His education consists of a Bachelor of Science in business administration from the University of Rhode Island and the CERTIFIED FINANCIAL PLANNER™ (CFP®) professional designation.
Paul’s experience and education have made him a multi-faceted professional capable of assisting people with virtually all their financial needs. His services include every facet of retirement planning, from 401(k) rollover services and income planning to wealth management and estate planning. Paul has been active in his community over the years as a youth sports coach. When he’s not spending time with his wife, Cindy, and their two children, who are both recent college graduates, Paul enjoys reading, playing golf, and fishing. Learn more about Paul by connecting with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.